2015 (3) TMI 304 - AT - Income Tax

Tribunal rules in favor of Toyota subsidiary in transfer pricing dispute 'sLengthPrice

The Assistant Commissioner of Income Tax, LTU Versus M/s. Toyota Kirloskar Motor (P) Ltd.

The Tribunal ruled in favor of the assessee, a subsidiary of Toyota Motor Corporation, in a transfer pricing dispute with its Associated Enterprise. The ... Determination of ALP - international transaction carried out by the assessee with its AE - adjustment of ALP was deleted by the Tribunal - Held that:- Trading and manufacturing segment of the assessee are not distinct and are inter-related warranting combined transaction approach. TPO has arrived at the bifurcation of the manufacturing and trading segmental operating results. In view of our conclusions that the trading and manufacturing segments are interlinked and therefore a combined transaction approach has to be adopted, we combine the results so arrived at by the TPO. If the segmental results are combined, the operating revenue of the assessee would be 3767.91 crores and the operating profit would be ₹ 94.34 crores. Thus, the operating profit margin on sales would be 2.517. Even assuming that the adjustment on account of operational efficiency made by the TPO is to be accepted, then the combined margin after adjustment of the five comparables which is given in para-20 of this order, would be 7.10%. If the arithmetic mean of the five comparables as above is tested as against the operating profit margin on sales of the assessee at 2.517%, then the same would be within the (+)/(-) 5% range of the arithmetic mean and therefore no addition by way of adjustment to the ALP can be made. In this view of the matter, we are of the view that the addition sustained by the DRP deserves to be deleted and is hereby deleted - Decided in favour of assessee. Issues Involved:1. Determination of Arm's Length Price (ALP) of an international transaction.2. Segregation of trading and manufacturing segments.3. Evaluation of royalty payment, technical fees, and other payments.4. Adjustment of ALP by the Transfer Pricing Officer (TPO).5. Tribunal's jurisdiction on determining ALP at NIL.Issue-wise Detailed Analysis:1. Determination of ALP of an International Transaction:The main issue in the appeal was the determination of the Arm's Length Price (ALP) of an international transaction carried out by the assessee with its Associated Enterprise (AE). The assessee, a subsidiary of Toyota Motor Corporation, Japan, engaged in manufacturing and selling vehicles, selected the Transactional Net Margin Method (TNMM) as the most appropriate method for transfer pricing analysis. The assessee compared its profit margins with those of seven comparable companies and concluded that its international transactions were at arm's length.2. Segregation of Trading and Manufacturing Segments:The TPO categorized the international transactions into two segments: manufacturing and trading. The TPO accepted that the trading segment's international transactions were at arm's length but found that the manufacturing segment's transactions were not. The TPO adjusted the profit margins of the comparable companies to equalize operational efficiency, concluding that the international transactions in the manufacturing segment were not at arm's length.3. Evaluation of Royalty Payment, Technical Fees, and Other Payments:The assessee challenged the TPO's separate evaluation of royalty payments, technical fees, and other payments using the Comparable Uncontrolled Price (CUP) method. The Tribunal held that the TPO and DRP did not adequately consider the assessee's submissions. The Tribunal emphasized that the Act and Rules contemplate determining ALP by aggregating interlinked international transactions.4. Adjustment of ALP by the TPO:The TPO proposed an adjustment to the ALP for the manufacturing segment, concluding that the margin earned by the assessee was much less than the arithmetic mean margin earned by comparable enterprises. The Tribunal, however, found that the trading and manufacturing segments were interlinked and should be evaluated together. By combining the segmental results, the Tribunal concluded that the operating profit margin on sales would be within the +/- 5% range of the arithmetic mean, thus no addition by way of adjustment to the ALP was necessary.5. Tribunal's Jurisdiction on Determining ALP at NIL:The Tribunal addressed whether the TPO could conclude that the ALP of international transactions was NIL due to the lack of services rendered or benefits derived. The Tribunal held that this issue was academic since it had already determined that the international transaction was at arm's length. The Tribunal also referred to an order for a previous assessment year, concluding that the TPO cannot determine the ALP of royalty payments at NIL.Conclusion:The Tribunal deleted the adjustment of Rs. 152,88,21,900 to the ALP made by the TPO for the manufacturing segment. It held that the trading and manufacturing segments were interlinked and warranted a combined transaction approach. The Tribunal also clarified that the TPO cannot determine the ALP of international transactions at NIL. The miscellaneous petition filed by the Revenue seeking clarification was dismissed, with the Tribunal emphasizing that the petition was misconceived and without merit.